Part 5: Non-standard audit reports issued

Central government: Results of the 2011/12 audits.

5.1
We issued 481 audit reports in our central government portfolio during the year ended 31 December 2012 (excluding entities in our education portfolio).14 Of these, 400 were standard audit reports and 81 were non-standard audit reports. In this Part, we detail the nature of the non-standard reports that we issued.

Unmodified opinions with "emphasis of matter" paragraphs

5.2
The following section summarises the matters relevant to understanding the financial and non-financial information for those public entities with audit reports that included unmodified opinions but also included "emphasis of matter" paragraphs.15

Uncertainties associated with disaster response/recovery

Uncertainties associated with the Canterbury earthquakes

5.3
We drew attention to disclosures in the Government's financial statements about the effects of the Canterbury earthquakes. In particular, we drew attention to disclosures about:

  • the uncertainties involved in estimating EQC's and Southern Response's support packages;
  • the uncertainties involved in estimating the Government's offer to purchase properties in the Canterbury residential red zone;
  • the uncertainty associated with the Government's share of local authority costs in response to the earthquakes and its share for restoring local authority water infrastructure damaged by the earthquakes.

5.4
At an entity level, these disclosures resulted in the inclusion of "emphasis of matter" paragraphs for:

  • EQC;
  • CERA; and
  • Southern Response and Group.

5.5
For EQC and Southern Response and Group, we confirmed that, for the year ended 30 June 2012, the "going concern" assumption had been appropriately used.

Uncertainties associated with the response to the oil spill from the grounding of the container vessel MV Rena

5.6
The audit report for the New Zealand Oil Pollution Fund (for the year ended 30 June 2012) included an "emphasis of matter" paragraph to draw attention to disclosures about the availability of Crown funds to cover the costs of response to the oil spill that occurred after the grounding of the container vessel MV Rena on 5 October 2011. The Crown had made further funds available to cover the costs of responding to the oil spill, which were expected to exceed the reserves in the fund at the time the audit report was issued.

Uncertainties arising from, or from the prospect of, structural change

5.7
Structural change continues within central government and the entities covered in this report. Both planned and actual changes create uncertainties that need to be considered in reading the financial and non-financial statements of entities subject to change.

5.8
We drew attention to the uncertainties arising from structural changes or expected future changes for:

  • Industrial Research Limited (IRL) for the year ended 30 June 2012 – we drew attention to the uncertainty about IRL's future, with the proposal that IRL become a subsidiary of Callaghan Innovation, a new Crown entity that was established on 1 February 2013. At the time the audit report was issued, the Bill establishing Callaghan Innovation and confirming the future of IRL had not been passed.
  • Maniapoto Māori Trust Board for the year ended 30 September 2012 – we drew attention to the uncertainty about the Trust Board's future given its intention to establish tribal entities to perform its functions.

5.9
We included "emphasis of matter" paragraphs in the audit reports of AgResearch (Meat Biologics Consortia) Limited (which is a subsidiary of AgResearch Limited) for the two years ended 30 June 2011 and 30 June 2012. The "emphasis of matter" paragraphs drew attention to disclosures about the appropriate use of the "going concern" assumption and an impending decision about the future of the company.

5.10
We drew attention to an agreement to change the ownership of The ECN Group Limited (which was a subsidiary of New Zealand Post Limited) for the year ended 30 June 2012 and that the "going concern" assumption had been used.

5.11
Our audit reports for 16 health regulatory entities and two secretariats for the year ended 30 June 2012 drew attention to the uncertainties over the outcome of a proposal for shared secretariat and office functions across the group. The health entities were:

  • Nursing Council of New Zealand;
  • Midwifery Council of New Zealand;
  • Pharmacy Council of New Zealand;
  • New Zealand Psychologists Board;
  • New Zealand Chiropractic Board;
  • Optometrists and Dispensing Opticians Board;
  • Physiotherapy Board of New Zealand;
  • Medical Sciences Council of New Zealand;
  • Occupational Therapy Board of New Zealand;
  • Osteopathic Council of New Zealand;
  • Podiatrists Board of New Zealand;
  • Psychotherapists Board of Aotearoa New Zealand;
  • Dietitians Board;
  • Medical Radiation Technologists Board;
  • Dental Council of New Zealand;
  • Medical Council of New Zealand;
  • Medical Sciences Secretariat; and
  • Health Regulatory Authorities Secretariat Limited.

Not using the going concern assumption to prepare financial statements

5.12
In a number of audits, we drew attention to the fact that entities had appropriately not used the "going concern" assumption because they had been disestablished or were expected to be disestablished in the near future. The following public entities' audit reports included such an "emphasis of matter" paragraph:

  • Ministry of Economic Development (disestablished on 1 July 2012);
  • Department of Labour (disestablished on 1 July 2012);
  • Ministry of Science and Innovation (disestablished on 1 July 2012);
  • Department of Building and Housing (disestablished on 1 July 2012);
  • Paraco Technology Limited (a subsidiary of AgResearch Limited);
  • PropertyInsight Limited (a joint venture between Geological and Nuclear Sciences Limited and Quotable Value Limited);
  • Phytagro LLC New Zealand Branch (a subsidiary of Phytagro New Zealand Limited) for the year ended 31 December 2011;
  • Charities Commission (disestablished on 1 July 2012);
  • Alcohol Advisory Council of New Zealand (disestablished on 1 July 2012);
  • Health Sponsorship Council (disestablished on 1 July 2012);
  • Crown Health Financing Agency (disestablished on 1 July 2012);
  • Mental Health Commission (disestablished on 1 July 2012);
  • Road Safety Trust (expected to be disestablished by 1 July 2013);
  • Public Trust Investment Funds – New Zealand and Australian Equities Investment Fund (No. 67); Public Trust Investment Funds – International Equities Investment Fund (No. 68);16
  • Balanced Income Fund (Public Trust Investment Fund No. 13);17
  • Te Runanga o Ngati Porou and Group, which was dissolved on 7 April 2012;
  • Treaty Relationship Company Limited and Group (a subsidiary of Te Rūnanga o Ngāti Whātua and Auckland District Health Board) for the year ended 30 June 2011 with an expectation of disestablishment within 12 months;
  • Northern Region Health Consortium Limited (a subsidiary of Te Rūnanga o Ngāti Whātua and Auckland District Health Board) for the year ended 30 June 2011, after which it was amalgamated with its parent company;
  • Ngāi Tahu Ancillary Claims Trust;
  • South Island Shared Service Agency Limited, for the two years ended 30 June 2011 and 30 June 2012;18
  • District Health Boards New Zealand Incorporated, for the year ended 30 June 2011;
  • Whisper Tech Limited (a subsidiary of Meridian Energy Limited);
  • Terrace Coal Mine Limited (a subsidiary of Solid Energy New Zealand Limited);
  • Biodiesel New Zealand Limited (a subsidiary of Solid Energy New Zealand Limited); and
  • Learning State Limited (ceased to operate September 2012).

Uncertainties about the value of unlisted investments

5.13
Uncertainties about the value of unlisted investments can have a material effect on the statement of financial performance and the statement of financial position.

5.14
The audit report for Public Trust and Group drew attention to disclosures about the value of some mortgage-backed securities. There is no comparable security to benchmark value and, as such, the Public Trust has adopted a discounted cash flow approach to valuation. The new approach to valuation was applied as at 31 December 2011 and resulted in a $10.1 million fair value gain at that time. Although we concur with the approach taken, we nevertheless wanted to acknowledge the uncertainties around the value of these securities given the number of judgements underpinning the valuation.

5.15
For New Zealand Venture Investment Fund Limited and Group and each of its nine subsidiaries, we included an "emphasis of matter" paragraph drawing attention to the uncertainties in measuring the fair value of unlisted venture capital investments. These uncertainties could, in turn, create uncertainties about the carrying amount of related-party loans recorded in the parent entity's financial statements.

Uncertainty in the carrying value of buildings given earthquake-strength issues

5.16
The audit report for Hutt Valley District Health Board included an "emphasis of matter" paragraph related to the uncertainty in the carrying value of certain buildings resulting from earthquake-strength issues and drawing attention to the fact that the Board has not made any adjustments to the carrying value of those buildings. The Board is gathering information, including estimates to strengthen buildings, and is expected to make decisions in 2013 about affected buildings.

Financial viability

5.17
The audit report for Whanganui District Health Board included an "emphasis of matter" paragraph that acknowledged the financial challenges faced by the DHB and the steps it is taking to improve its financial position. We also noted support from the Crown to meet cash-flow requirements.

Modified opinions

Adverse opinions

5.18
During 2012, we issued an adverse opinion for two public entities that did not recognise their museum collection assets nor the associated depreciation expense that is a requirement of generally accepted accounting practice:19

  • Royal New Zealand Navy Museum Trust Incorporated (for the two years ended 30 June 2011 and 30 June 2012); and
  • RNZAF Museum Trust Board.

Qualified opinions

5.19
We also issued qualified opinions on the financial or non-financial information of eight public entities.

5.20
A qualified opinion is issued if there is a disagreement with the treatment or disclosure of an issue in the financial statements or when we cannot get enough audit evidence about an issue.

5.21
We issued qualified opinions because we disagreed with the accounting treatment used by the following two entities:

  • Counties Manukau District Health Board (for the two years ended 30 June 2011 and 30 June 2012). We disagreed with the DHB's accounting treatment of certain funding from the Ministry of Health.
  • Ngati Whakaue Endowment Trust (for the year ended 31 December 2011). We disagreed with how the Trust recognised the value of land on the basis that it departed from generally accepted accounting practice.

5.22
We issued a qualified opinion for the New Zealand Fire Service Commission for the two years ended 30 June 2011 and 30 June 2012 because industrial action prevented performance data being collected during part of the audit period.

5.23
In the case of the Tauranga Moana Māori Trust Board, we issued a qualified opinion for the year ended 30 June 2011 because we could not get enough audit evidence to confirm the valuation of the Board's investment in a joint venture. The joint venture operated kiwifruit orchards affected by the PSA virus, which caused a significant decrease in the rating valuation of the joint venture's land and buildings.

5.24
We issued a qualified opinion for the Māori Trustee and Group for the year ended 31 March 2012 because we were unable to confirm the financial information for an associated company.

5.25
We issued qualified opinions for the following entities because we could not get enough assurance to confirm the completeness of revenue:

  • Auckland DHB Charitable Trust (a trust controlled by Auckland District Health Board);
  • New Zealand Māori Arts and Craft Institute; and
  • New Zealand Post Recycle Centre Limited,20 for the two years ended 30 June 2011 and 30 June 2012.

14: Our audit reports were issued between 1 January and 31 December 2012. Most of these reports relate to 2011/12 except where we explain (arrears). We note where balance dates differ from 30 June.

15: No "other matter" paragraphs were included in audit reports.

16: Audits for the year ended 31 March 2012. The expectation is for the entities to be disestablished within 12 months.

17: Audit for the year ended 31 March 2012. Disestablishment is expected within 12 months.

18: South Island Shared Service Agency Limited ceased operations on 1 December 2011.

19: A modification to the audit report of a subsidiary may not affect the audit report of its parent entity if, in our judgement, the misstatement would not materially influence readers' overall understanding of the financial statements of the group.

20: New Zealand Post Recycle Centre Limited is a subsidiary of New Zealand Post Limited.

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